ESG to influence 90% of India-bound investments in 5 years: Bain & Co

The environmental, social, and corporate governance (ESG) practices of Indian companies could be one of the deciding factors for 90% of inbound investments, five years from now, says Jenny Davis-Peccoud, founder and co-leader, Global Sustainability & Responsibility Practice, Bain & Company.

In an exclusive interaction with Fortune India, Davis-Peccoud says only 40% of investors considered ESG as part of their due diligence five years ago, indicating a significant acceleration in ESG adoption across the sector.

"There is a lot of capital flow into some of those sustainable areas. In India, the area that is getting the greatest capital flow is renewable," she says. Citing a recent Bain & Co analysis, Davis-Peccoud says that ESG gained importance as funds are increasingly including ESG as a part of their diligence process. Assets under management (AUM) for ESG funds rose from $275 million in 2020 to $650 million in 2021 in India, a jump of about 150%, the study had pointed out.

"The two areas that are the biggest in terms of number of deals in sustainable areas are clean energy and smart mobility. Sustainable food is the third one. These are the biggest not in terms of number of deals, but in terms of value of those deals. While clean energy comprises of about 70% of all such deals, smart mobility is another 20%. And there are billions of dollars out to be flowing in as well," she says.

Highlighting the opportunity in sustainable businesses, Davis-Peccoud says United Nations has estimated that by implementing SDGs, there is a value creation potential of up to $12 trillion and this includes investment in renewable energy, education technology, water technology etc.

The ESG adoption in India is driven by big businesses, both foreign and Indian, she says. "India is a part of the supply chain for a lot of global multinational corporations and they all have high standards. The pressure from the MNCs is going to be ever increasing. It may be 10 to 40% in a given market, but that is enough to start the change. Multinationals will be a force ahead of the government. Also, several Indian companies are MNCs themselves. Indian MNCs can use their presence in markets that are potentially ahead from a regulatory and technology perspective to kick start and start helping shape up the model and drive down some of the cost, some of the operational challenges in transitioning and use that back to India," Davis-Peccoud says.

She also points out that unlike in 2008, when global financial crisis caused sustainability priorities to fall off a cliff, it was gaining traction during Covid-19 crisis. "When everybody said sustainability is going to be on the back burner, we did not see that at all. The vast majority that we talked to said Covid actually accelerated sustainability because you started to see the fragile nature of everything from human health to climate to supply chains."